The Cadbury Report 1992: Shared Vision and Beyond Neeta Shah & - - PowerPoint PPT Presentation

The Cadbury Report 1992: Shared Vision and Beyond

Neeta Shah & Christopher J. Napier

Governance – not a new problem

• The Cadbury Report is nearly 25 years old
• As an expression, “corporate governance”

seems to emerge in legal writings in 1930s

• Important contribution of Bob Tricker’s book

Corporate Governance (1984)

• Problems of governance are recurring,

particularly role of company directors

Victorian non-executive directors

Marquess of Tweeddale Earl of Donoughmore

Good chaps and bad eggs

Gerard Lee Bevan Clarence Hatry Lord Kylsant

How was Cadbury different?

• Previous UK financial scandals usually led to

legislative changes:

• City of Glasgow Bank failure led to Banking Act of

1878

• London & General Bank frauds (Jabez Balfour) led

to Companies Act 1900

• City Equitable Life Insurance fraud (Gerard Lee

Bevan) led to Companies Act 1929

• Royal Mail Steam Packet Co. (Lord Kylsant) led

(eventually) to Companies Act 1948

• Fire, Auto & Marine (Emil Savundra) led to

Companies Act 1967

How was Cadbury different?

• Cadbury Report offered a code of best practice
• Based on belief that “one size fits all” solutions

are not appropriate

• Key concept of comply or explain
• Report emerges against an interesting

background:

• “Big Bang” a relatively recent event – many traditional

informal mechanisms overthrown

• Financial Reporting Council recently established –

looking to expand remit beyond accounting standards

• Cadbury’s own background and personality

Defining corporate governance

• Cadbury’s definition is “the system by which

companies are directed and controlled”

• Emphasis on role of directors, both

individually and collectively as the board.

• Assumption of unitary board model
• As “first mover”, Cadbury’s definition was

echoed by many subsequent governance codes, including the OECD Principles of Corporate Governance

Different notions of the “company”

• The “company” is the shareholders

collectively, with the board as their representatives controlling management (who are employees carrying on the company’s business):

• This is usually associated with a philosophy of

shareholder primacy

• The “company” is the business itself, and the

directors are the “governors” of the business:

• This may be associated with a philosophy that
• ther stakeholders are also important

Other definitions of governance

• “Giving overall direction to the enterprise, overseeing

and controlling the executive actions of management and satisfying legitimate expectations of accountability and regulation by interests beyond the corporate boundary.”

[Robert Tricker, Corporate Governance, 1984]

• “The process of supervision and control intended to

ensure that the company’s management acts in accordance with the interests of shareholders.”

[John Parkinson, Corporate Power & Responsibility, 1994]

Other definitions of governance

• “Ways to which suppliers of finance to corporations

assure themselves of getting a return on their investment”.

[Shleifer & Vishny, “A survey of corporate governance”, Journal of Finance, 1997]

• This definition emphasises the financial aspects of

corporate governance, which is what Cadbury was commissioned to review back in 1991

A window into governance research

• Search of key journals to identify articles that draw on

Cadbury definition

• Many papers do not provide a definition of corporate

governance (though they may refer to Cadbury, OECD

• r a subsequent national governance code)
• Research is diverse in terms of theoretical frameworks

used

• Much research is quantitative, but increasing use of

qualitative methods:

• Some studies are explicitly “mixed-methods”

A window into governance research

• Geographical dispersion:
• Many studies in “Anglophone” countries
• Developed economies with active stock markets
• Emerging/developing economies with smaller stock

markets

• Some comparative studies, often regional

A window into governance research

• Common research topics:
• Attitudes of stakeholders to governance
• Disclosed governance practices and their

“determinants”

• Influence of governance practices on firm-specific

variables, e.g.:

• “Firm performance”
• Financial structure
• Analyst following/ratings by external agencies
• Social and environmental practices

Challenges in governance research

• Statistical significance prized over “real”

significance

• Effect size often not examined
• Decline in variation of key governance “variables”
• ver time
• Governance variables may not change over period
• f investigation for specific companies
• Is “good performance” the same as “higher

returns”?

• How long does it take for governance changes to

have an impact?

Codes as starting points, not ends

• Many subsequent reports and reviews subsequent

to Cadbury

• UK Corporate Governance Code and OECD

Principles never a final version, always subject to updating

• Recurrent themes:
• Shareholder focus – other stakeholders still largely
• verlooked
• Financial focus
• Still largely reliant on “good chaps” – role of board in

setting the “tone at the top”

Future challenges

• Does increasing use of “Executive Committees” in

large companies make the Board of Directors even more distant from day-to-day operations?

• Are modern corporations increasingly

“unaccountable” and “ungovernable”?

• The information gap – how can directors “direct and

control” what they don’t know about?

• Can risk management systems address these concerns, or

do they just lead to “boilerplate”?

• Is the introduction of “Anglo-Saxon” governance in

emerging economies achieving anything more than “ceremonial compliance”?

• The “bad eggs” are still out there!